We Think Bastei Lübbe (ETR:BST) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Bastei Lübbe AG (ETR:BST) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bastei Lübbe

How Much Debt Does Bastei Lübbe Carry?

As you can see below, Bastei Lübbe had €2.91m of debt at September 2020, down from €6.87m a year prior. But it also has €4.20m in cash to offset that, meaning it has €1.29m net cash.

A Look At Bastei Lübbe's Liabilities

According to the last reported balance sheet, Bastei Lübbe had liabilities of €31.0m due within 12 months, and liabilities of €6.79m due beyond 12 months. Offsetting these obligations, it had cash of €4.20m as well as receivables valued at €15.2m due within 12 months. So its liabilities total €18.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bastei Lübbe is worth €49.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Bastei Lübbe also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Bastei Lübbe saw its EBIT drop by 6.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bastei Lübbe's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bastei Lübbe may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Bastei Lübbe actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Bastei Lübbe's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.29m. And it impressed us with free cash flow of €9.1m, being 217% of its EBIT. So we don't have any problem with Bastei Lübbe's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bastei Lübbe is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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